Tax Transparency and Social Welfare: The Role of Government Commitment

Abstract

Although transparency has long been held as the key principle of taxation, recent behavioral public finance theory has shown that it may reduce social welfare as inattention can alleviate behavioral distortions. This paper extends this analysis by modeling inattention as a noise in the tax rate signal received by Bayesian citizens. In equilibrium, we find that transparency will improve social welfare by ensuring the government's ability to commit to a fairly low tax rate that is socially optimal. Moreover, this model yields new sufficient statistics formulas that inform whether a policy effort to ensure tax transparency is socially worthwhile.